Fidelity Select Chemicals Portfolio

Transcription

1 Fidelity Select Chemicals Key Takeaways For the semiannual reporting period ending August 31, 2017, the fund rose 6.96%, just ahead of the 6.49% return of the MSCI U.S. IMI Chemicals 25/50 Index. Chemicals stocks outperformed the broadly based S&P 500 index as global economic fears receded and industry consolidation and strategic alternatives appealed to investors. Versus the MSCI industry index, picks within the diversified chemicals and commodity chemicals groups provided the biggest boost to fund performance. Within diversified chemicals, the fund's timely ownership of Chemours was once again our top individual contributor. The fund's out-of-benchmark stake in the trading companies & distributors group, however, dragged on fund performance. Here, our stake in Univar hurt most. Underweighting the industrial gases group also held back the fund's relative result. The fund is positioned less conservatively at period end, as Manager Rick Malnight is focusing less on high-quality, but highly valued firms and more on identifying stocks he considers mispriced versus those he expected to experience a positive change in fundamentals. The Board of Trustees has agreed to present a proposal to shareholders to eliminate each sector/industry fund's fundamental "invests primarily" policy and to modify the fundamental concentration policy for certain funds. If the proposals are approved, expected in the fourth quarter, the changes will take place on or about January 1, 2018 (or the first day of the month following shareholder approval), and will not impact how the funds are managed. MARKET RECAP The U.S. equity bellwether S&P 500 index returned 5.65% for the six months ending August 31, Following a strong start to 2017, equity markets leveled off in March amid fading optimism for President Trump's pro-business agenda and stalled efforts by Congress to repeal and replace the Affordable Care Act (ACA). Upward momentum soon returned and continued until the index cooled off in August, when geopolitical tension escalated and uncertainty grew regarding the future of health care, tax reform and the debt ceiling. In a stark reversal from 2016, growth-oriented stocks handily topped their value counterparts. Among sectors, information technology (+15%) was a standout, surging as a handful of major index constituents posted strong returns. Health care (+9%) also topped the broader market, climbing from April to period end following renewed efforts to reconsider the ACA. Conversely, financials (+1%) lagged because sentiment regarding the potential for reduced regulation and lower taxes faded as the White House turned its attention to other initiatives. Rising interest rates held back real estate (+4%). Investors' general preference for risk assets, coupled with increased competition, hampered consumer staples (+1%) and telecommunication services (-5%). Lastly, lower oil prices sent energy (-10%) to the bottom of the sector performance rankings. Not FDIC Insured May Lose Value No Bank Guarantee

2 Q&A An interview with Manager Rick Malnight Fund Facts Trading Symbol: Richard Malnight Manager FSCHX Start Date: July 29, 1985 Size (in millions): $1, Investment Approach Fidelity Select Chemicals is an industry-based, equity-focused strategy that seeks to outperform its benchmark through active management. We conduct in-depth fundamental research, supported by Fidelity's deep and experienced global cyclicals team, to develop a differentiated view from consensus on productand end-market trends. We follow a contrarian investment approach and focus on companies in which we anticipate a positive change in business fundamentals before it is recognized and properly valued in the company's stock price. We also look for reasonably valued stocks of firms with improving returns on capital, healthy free-cash-flow yields, the potential for price-earnings multiple expansion, or defensive-growth characteristics. Sector and industry strategies could be used by investors as alternatives to individual stocks for either tactical- or strategic-allocation purposes. Q: Rick, how did the fund perform for the six months ending August 31, 2017 The fund performed well for the six months, advancing 6.96%, ahead of both the 6.49% gain of the MSCI U.S. IMI Chemicals 25/50 Index and the 5.65% return of the broader S&P 500 index. The fund also outperformed its natural resources peer group average by a wide margin. For the corresponding 12 months, results were even more favorable. The fund gained 24.81%, beating the industry benchmark by 6 percentage points, and more than doubling the result of the peer average. Q: What was noteworthy about the chemicals industry the past six months The chemicals industry generally is closely tied to the state of the economy the price of oil in particular. Chemicals stocks benefited this period as concern receded about several global economic developments, including slowing growth in China and further collapse in oil prices. Investors began to favor pro-cyclical, more economically sensitive investments such as chemicals stocks that stood to benefit from potential global growth. The industry also has experienced a surge of firms pursuing mergers and acquisitions (M&As), the largest of which (DowDuPont) closed on August 31. I will discuss this merger in more detail later on. Generally, I think a rise in merger activity can be a sign of industry consolidation that, in turn, may boost stock prices and returns. Q: What contributed to the fund's performance versus the industry index this period Choices in the diversified and commodity chemicals groups provided the biggest boost. Within diversified chemicals, the fund's timely ownership of Chemours was our top individual contributor for the second review period in a row. This holding represents an investment in the titanium dioxide (TiO2) cycle, which has been supported of late by a strong construction market and constrained supply. I also liked Chemours because I found its specialty chemicals business underappreciated by the market. A prime 2 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

3 example of this is the firm's new class of more environmentally friendly refrigerants, which recently were mandated for the European auto air conditioner market and may be required in a number of other applications globally over the next few years. The fund also benefited from overweight positions in Tronox and Kraton, as both names returned about 20% the past six months. Like Chemours, Tronox is a major player in the TiO2 space. I liked the firm as the only producer fully back-integrated to raw material titanium ores. In February, the firm announced plans to acquire The National Titanium Dioxide Co. (also known as Cristal). The combined entity would be the world's largest TiO2 producer. The market reacted positively to the news. I maintained an overweight stake here based on my view that there are a number of potential synergies, should the acquisition close. Specialty chemicals firm Kraton manufactures polymers that are used as synthetic, durable alternatives to rubber and other products. Shares rose steadily in the spring as their earnings, which were pressured from a big early-2017 spike in raw material butadiene prices, began to recover. Q: Which decisions detracted Stock selection in the fertilizers & agricultural chemicals group proved a modest drag, as the group's cyclical nature weighed on results. Untimely positioning in nitrogen producer CF Industries Holdings posted negative results this period. I trimmed the fund's stake in CF considerably the past six months, ending the period with roughly a quarter of the shares the fund held at the beginning of the period. In hindsight, I would have liked to decrease our stake in CF sooner. The largest individual detractor was our non-index stake in chemicals distributor Univar. I was confident that the company's new CEO would be able to make a positive impact on the firm, whose margins were lagging competitors. Unfortunately, Univar's shares took a pause after a strong run as investors' enthusiasm about the new leadership diminished. Market worries surrounding the firm's private-equity ownership further weighed on the stock. Our stake in ethylene producer LyondellBasell Industries also hurt. Speculation that the company could make a large acquisition caused a stir in the market, as some investors worried the possible deal would be overpriced. What's more, a change to LyondellBasell's capital allocation policy and inconsistencies with the firm's execution of its share buyback program further worried investors. Finally, LyondellBasell and others in its industry have suffered amid concerns about overcapacity that could pressure margins. However, I do not see that as a foregone conclusion. Believing that market worries, rather than fundamentals were dictating Lyondell's stock price, I added to our position. Q: What other changes did you make to fund positioning this period I added to our stake in Tronox based on my belief that the stock was underappreciated by the market. I also added to our Westlake Chemical stake, another relative contributor from the commodity chemicals group. The firm participates in the chlorovinyl market (i.e., caustic soda and PVC), which continued to see product margins improve over the period. What's more, the firm's 2016 acquisition of Axiall may continue to unlock value, in my view. I initiated a position in agricultural, consumer and industrial chemicals firm FMC Corp. in April. In addition to finding the firm's growth prospects appealing, I considered the stock to be trading at a great price. To balance these commodity trades, I reduced the fund's position in Trinseo, as I found the company's valuation to be a bit stretched. I also eliminated our stake in Orion Engineered Carbons as I found better opportunities elsewhere. Q: What trends are you following at period end Since taking over the fund last year, I have concentrated on three commodity markets: ethylene, TiO2 and chlorovinyl products. This focus has not changed. Commodity chemicals trade at materially lower valuation multiples than specialty chemicals, and I believe we will continue to find attractive opportunities here. In our last interview, I discussed how the future of ethylene production could help determine a number of factors for the industry in the near-to-intermediate term. We will see how this plays out in the next 12 months, as we gauge the impact of production from long-anticipated new capacity that will be starting up in This will finally settle the largely theoretical debate over the impact of this capacity that has hung over the ethylene sector for the past three years. Additionally, it appears to me that special situations including M&A activity and self-help measures, such as cost cutting are driving value and shaping the industry landscape against a slow-growth backdrop. A number of firms are continuing to break apart and move to niche areas of the market in order to satisfy investors' preference for more-focused companies over conglomerates. It will be interesting to see how this alters the investment landscape moving forward. 3 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

4 LARGEST CONTRIBUTORS VS. BENCHMARK Rick Malnight on the Dow/DuPont merger: "During our interview six months ago, I mentioned how I had significantly increased the fund's cumulative position in both Dow and DuPont, with the hope of capturing potential valuation benefits from their plan to merge and then fragment into three separate, more-focused companies. "DowDuPont plans to separate into three pieces with three different areas of focus: agriculture, material science and specialty products. "This decision comes as no surprise to anyone who has been tracking the extensive amount of M&A activity in the chemicals industry. It was surprising, however, that the debate over the scope of the three spin-offs spilled into the pages of the Wall Street Journal. This amount of press highlighted the fact that, even though the chemical industry has been around for a very long time, there is still significant debate over defining the optimal scale and scope for a chemicals company. In the end, the new company's scope decision reflected investors' emerging preference for narrowly focused chemical companies "At period end, roughly 30% of fund assets are in either Dow or DuPont. In September, the combined firm will be trading as DowDuPont. Only time will tell how the effects of this merger and subsequent spinoffs will ripple through the industry." Holding Market Segment Average Relative Relative Contribution (basis points)* The Chemours Co. LLC Diversified Chemicals 2.89% 104 The Mosaic Co. Fertilizers & Agricultural Chemicals -1.52% 81 Tronox Ltd. Class A Commodity Chemicals 1.84% 51 Kraton Performance Polymers, Inc. Specialty Chemicals 1.19% 22 RPM International, Inc. Specialty Chemicals -1.38% 19 * 1 basis point = 0.01%. LARGEST DETRACTORS VS. BENCHMARK Holding Univar, Inc. Platform Specialty Products Corp. CF Industries Holdings, Inc. LyondellBasell Industries NV Class A Market Segment Trading Companies & Distributors Average Relative Relative Contribution (basis points)* 2.99% -57 Specialty Chemicals 2.52% -47 Fertilizers & Agricultural Chemicals -0.20% -40 Commodity Chemicals 6.51% -36 Praxair, Inc. Industrial Gases -6.01% -32 * 1 basis point = 0.01%. 4 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

5 10 LARGEST HOLDINGS Holding Market Segment Six Months Ago E.I. du Pont de Nemours & Co. Diversified Chemicals 17.16% 17.76% The Dow Chemical Co. Diversified Chemicals 12.69% 12.29% LyondellBasell Industries NV Class A Commodity Chemicals 10.99% 11.09% Monsanto Co. Fertilizers & Agricultural Chemicals 8.54% 7.36% The Chemours Co. LLC Diversified Chemicals 4.72% 3.74% Sherwin-Williams Co. Specialty Chemicals 4.54% 4.42% Linde AG Industrial Gases 3.60% -- FMC Corp. Fertilizers & Agricultural Chemicals 3.46% -- Univar, Inc. Trading Companies & Distributors 3.29% 3.17% Tronox Ltd. Class A Commodity Chemicals 3.26% 0.58% 10 Largest Holdings as a % of Net Assets 72.25% 72.58% Total Number of Holdings The 10 largest holdings are as of the end of the reporting period, and may not be representative of the fund's current or future investments. Holdings do not include money market investments. MARKET-SEGMENT DIVERSIFICATION Market Segment Six Months Ago Diversified Chemicals 38.18% 37.14% Commodity Chemicals 21.45% 20.30% Specialty Chemicals 18.07% 22.25% Fertilizers & Agricultural Chemicals 13.94% 12.60% Industrial Gases 3.76% 3.02% Trading Companies & Distributors 3.29% 3.17% Biotechnology 0.11% -- ASSET ALLOCATION Asset Class Six Months Ago Domestic Equities 90.96% 97.90% International Equities 7.83% 0.58% Developed Markets 7.32% 0.58% Emerging Markets 0.51% 0.00% Tax-Advantaged Domiciles 0.00% 0.00% Bonds 0.00% 0.00% Cash & Net Other Assets 1.21% 1.52% Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the portfolio composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number. "Tax-Advantaged Domiciles" represent countries whose tax policies may be favorable for company incorporation. 5 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

6 FISCAL PERFORMANCE SUMMARY: Periods ending August 31, Month Cumulative YTD 1 3 Annualized 5 10 / LOF 1 Select Chemicals Gross Expense Ratio: 0.80% % 17.85% 24.81% 8.14% 14.28% 11.94% S&P 500 Index 5.65% 11.93% 16.23% 9.54% 14.34% 7.61% MSCI US IMI Chemicals 25/50 Linked Index 6.49% 14.29% 18.81% 7.27% 14.12% 10.75% Morningstar Fund Natural Resources 1.02% 4.37% 11.96% -4.26% 1.74% 0.73% % Rank in Morningstar Category (1% = Best) % 2% 1% 1% # of Funds in Morningstar Category Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Please see the last page(s) of this Q&A document for most-recent calendarquarter performance. 6 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

7 Definitions and Important Information Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity. FUND RISKS The value of the fund's domestic and foreign investments will vary from day to day in response to many factors. Stock values fluctuate in response to issuer, political, regulatory, market, or economic developments. You may have a gain or loss when you sell your shares. Investments in foreign securities, especially those in emerging markets, involve risks in addition to those of U.S. investments, including increased political and economic risk, as well as exposure to currency fluctuations. Because FMR concentrates the fund's investments in a particular industry, the fund's performance could depend heavily on the performance of that industry and could be more volatile than the performance of less concentrated funds and the market as a whole. The fund is considered non-diversified and can invest a greater portion of assets in securities of individual issuers than a diversified fund; thus changes in the market value of a single investment could cause greater fluctuations in share price than would occur in a more diversified fund. The chemical industry can be significantly affected by intense competition, product obsolescence, raw materials prices, and government regulation, and can be subject to risks associated with the production, handling, and disposal of hazardous components. IMPORTANT FUND INFORMATION Relative positioning data presented in this commentary is based on the fund's primary benchmark (index) unless a secondary benchmark is provided to assess performance. The Board of Trustees unanimously approved a proposal to shareholders for trustee election that would combine oversight of Fidelity's sector funds with Fidelity's broader equity and high income funds under a single Board of Trustees. If approved, the unified Board would be effective on or about 3/1/18. used as a recommendation for any sector or industry. RANKING INFORMATION 2017 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or redistributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Fidelity does not review the Morningstar data and, for mutual fund performance, you should check the fund's current prospectus for the most up-to-date information concerning applicable loads, fees and expenses. % Rank in Morningstar Category is the fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest (or most favorable) percentile rank is 1 and the lowest (or least favorable) percentile rank is 100. The top-performing fund in a category will always receive a rank of 1%. % Rank in Morningstar Category is based on total returns which include reinvested dividends and capital gains, if any, and exclude sales charges. Multiple share classes of a fund have a common portfolio but impose different expense structures. RELATIVE WEIGHTS Relative weights represents the % of fund assets in a particular market segment, asset class or credit quality relative to the benchmark. A positive number represents an overweight, and a negative number is an underweight. The fund's benchmark is listed immediately under the fund name in the Performance Summary. INDICES It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. S&P 500 is a market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MSCI US IMI Chemicals 25/50 Index is a modified marketcapitalization-weighted index of stocks designed to measure the performance of Chemicals companies in the MSCI U.S. Investable Market 2500 Index. The MSCI U.S. Investable Market 2500 Index is the aggregation of the MSCI U.S. Large Cap 300, Mid Cap 450, and Small Cap 1750 Indices. Index returns shown for periods prior to January 1, 2010 are returns of the MSCI US Investable Market Chemicals Index. MARKET-SEGMENT WEIGHTS Market-segment weights illustrate examples of sectors or industries in which the fund may invest, and may not be representative of the fund's current or future investments. Should not be construed or 7

8 Manager Facts Richard Malnight is a research analyst and portfolio manager at Fidelity Management & Research Company (FMR Co.), the investment advisor for Fidelity's family of mutual funds. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and other financial products and services to more than 20 million individuals, institutions and financial intermediaries. In this role, Mr. Malnight is responsible for covering the chemicals industry and for managing Fidelity Select Chemicals. Prior to assuming his current responsibilities, Mr. Malnight was a research analyst in the High Income group at FMR Co., covering the chemicals, refining, steel and mining industries. Before joining Fidelity in 2007, Mr. Malnight was a research analyst at W.R. Huff Asset Management, where he covered the chemicals and paper industries. Additionally, Mr. Malnight held various roles with Air Products and Chemicals, Inc., primarily managing business units in the U.S. and Asia supplying industrial gases to customers in the chemical, refining, steel, and electronics industries. He has been in the investments industry since Mr. Malnight earned his bachelor of science in engineering degree from the University of Pennsylvania and his master of business administration degree in finance from The Wharton School of the University of Pennsylvania. He is also a CFA charterholder. 8 For definitions, fund risks and other important information, please see the Definitions and Important Information section of this Q&A.

9 PERFORMANCE SUMMARY: Quarter ending September 30, Annualized 5 10 / LOF 1 Select Chemicals Gross Expense Ratio: 0.80% % 10.16% 15.09% 11.75% 1 Life of Fund (LOF) if performance is less than 10 years. Fund inception date: 07/29/ This expense ratio is from the prospectus in effect as of the date shown above and generally is based on amounts incurred during that fiscal year. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate; therefore, you may have a gain or loss when you sell your shares. Current performance may be higher or lower than the performance stated. Performance shown is that of the fund's Retail Class shares (if multiclass). You may own another share class of the fund with a different expense structure and, thus, have different returns. To learn more or to obtain the most recent month-end or other share-class performance, visit fidelity.com/performance, institutional.fidelity.com, or 401k.com. Total returns are historical and include change in share value and reinvestment of dividends and capital gains, if any. Cumulative total returns are reported as of the period indicated. Before investing in any mutual fund, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest. Past performance is no guarantee of future results. Views expressed are through the end of the period stated and do not necessarily represent the views of Fidelity. Views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. The securities mentioned are not necessarily holdings invested in by the portfolio manager(s) or FMR LLC. References to specific company securities should not be construed as recommendations or investment advice. Diversification does not ensure a profit or guarantee against a loss. Information included on this page is as of the most recent calendar quarter. S&P 500 is a registered service mark of Standard & Poor's Financial Services LLC. Other third-party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR LLC or an affiliated company. Fidelity Brokerage Services LLC, Member NYSE, SIPC., 900 Salem Street, Smithfield, RI Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI FMR LLC. All rights reserved. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee